Outsourcing & Offshoring. What’s the Difference?

With the rise of globalisation, businesses are feeling pressure to perform more efficiently, particularly in the face of increased competition and/ or business costs.

And where there’s a problem, there’s a solution. This is why outsourcing and offshoring have become commonplace in today’s business world.

Now you may have heard these terms – “outsourcing” and “offshoring” before – but what do they mean? In this post, we explain their differences and help you decide which is best suited to your business.

What is outsourcing?

The Oxford dictionary’s definition of outsourcing is to “obtain (goods or a service) by contract from an outside supplier”.

All number of business processes can be contracted out to another, third party business:

back office functions,

accounting,

legal advice,

medical analysis,

engineering,

science,

architecture,

customer service,

information technology.

Engaging an external company to perform these tasks may also be known as “business process outsourcing”, or “BPO”.

Why outsource?

The case for outsourcing arises when a business lacks its own specialist resources, or the justification to develop those resources itself.

The company may decide it cannot perform certain tasks efficiently as it doesn’t have the tools, equipment, or knowledge in-house. In these instances, the more cost effective option is to contract the work out to an external third party supplier.

Outsourcing of businesses processes can include either domestic or foreign business. With greater internet speeds, better smartphone apps, and development of cloud computing, foreign outsourcing is today an efficient and cost effective option.

Traditionally, outsourcing began when large scale manufacturers did not have the equipment, machinery available to make every component of their finished product.

But outsourcing has now moved beyond just goods, and to the provision of services across whole business sectors.

From marketing to accounting, information technology, software development to customer service. From a small graphic design project to whole departments being outsourced, outsourcing comes in all shapes and sizes.

What is offshoring?

Returning to the Oxford Dictionary, offshoring is “the practice of basing some of a company’s processes or services overseas, so as to take advantage of lower costs”.

For example, a telecommunications company may relocate its customer service business process to a foreign country. Or a software company may move its technical support function overseas.

This overseas entity is owned by the business and has the responsibility of performing certain business processes.

Offshoring one’s business processes can have these key advantages:

increased efficiency,

better scalability,

improving supply chains,

lower labour costs.

The combination of which lead to an overall impact of lowering the cost of operations.

The new free trade agreements set by Australia with other countries have further benefitted offshoring as a viable business strategy.

Then, there is offshore outsourcing

The practices of outsourcing & offshoring are not always mutually exclusive, and “offshore outsourcing” refers to when a company contracts a business process to a foreign company.

Confused yet? Let’s recap with this example:

Outsourcing

Instead of hiring a team of in-house lawyers, the Australian company, ABC Holdings, sends their legal contract work to another Australian firm, ACME Lawyers.

Offshoring

ABC Holdings, looking at future growth, sets up a foreign entity overseas, ABC Offshore Lawyers. Creating its own legal department with a team of in-house lawyers.

This strategy allows the company to take advantage of lower staffing costs and depending on the offshore location, a time-zone advantage.

Offshore Outsourcing

In this scenario, ABC Holdings contracts an overseas third party company, Global Lawyers, to complete its legal contract work. This strategy allows them the best of both worlds.

What type of services are the best for offshoring?

Not all services are suitable for offshoring, and some work better than others. If a proposed task meets some or all of the following criteria, it will have the best outcome in terms of productivity, efficiency and cost-effectiveness.

Significant wage gap

Likely to be the most common reason why a company will offshore its services. Countries that provide the bulk of offshoring services are those that have relatively low wages, saving expenditure for the contracting company.

Suitable for Telecommuting

Services that are already a part of the telecommuting phenomenon, including tasks and projects that can be completed from a remote location.

High information content services

Business processes that deal predominantly with information and knowledge, and less with the physical handling of product, such as machining, or the transportation of goods.

Internet transmission

The work required can be sent electronically over the internet, saving time in transferring information and data to the offshore company. This, in turn, generates revenue faster by turning the work around quicker, often utilising different time zones.

Easy to set up

The business process or service is easy to replicate in a new country or location with existing skill sets or low-level training.

Repeatable

The best types of services are those that contain the same processes, repeated for each project.

So, is offshore outsourcing right for your business?

As with any business decision, when seeking to outsource some of your business processes, careful investigation of the company you are contracting to is mandatory.

Due to the positive benefits of lower costs, efficiency, and labour flexibility, you may find offshoring/ outsourcing beneficial and it allows your business to focus on its core competencies.

However due diligence may also turn up some negatives such as security concerns or proprietary information issues. And this could be in addition to communication barriers caused by legal or cultural differences.

But if your business is perhaps struggling to cover every function in-house, employing these customised services can be a sound & cost effective business decision.

There are many suppliers of outsourcing services, across nearly every industry. Before considering outsourcing, a thorough analysis of your business will identify its strengths & weaknesses.

If the business case for outsourcing those weaknesses exists, commence an investigation of third party providers of that skillset.

As an outsource accounting company, Penguin Management offers a full suite of accounting, payroll and HR, virtual CFO and business advisory services.

Our expert team works with your existing staff, allowing you to focus on your business’s core competencies, and reach your success goals.